T H U R S D A Y ,  J A N U A R Y   2 9 ,  2 0 0 9 

 Big “I” National News

P&C Trends
Liberty Mutual Now Selling to Mid-Sized Businesses Exclusively Through Independent Agents
Company launches Liberty Mutual Middle Market, discontinues direct distribution and Wausau brand.

Liberty Mutual has given independent agents and brokers, and mid-sized business customers something they’ve been seeking for years --- access to its commercial property-casualty business through the independent agent channel.

Last week, the company discontinued direct distribution to mid-sized businesses and launched its new commercial business unit, Liberty Mutual Middle Market, which will sell commercial p-c products exclusively through independent agents and brokers. Liberty Mutual also retired the Wausau brand that agents previously used to access its commercial p-c products. (Click here to read the announcement from Liberty Mutual.)

According to Mark Butler, chief operating officer of the Liberty Mutual Middle Market business unit, a demand for Liberty Mutual’s commercial p-c products existed for years among agents and customers, so the new business unit is a long-awaited development.

“It was a difficult decision to walk away from 97 years of history (of direct sales),” he says. “But in order for Liberty Mutual Middle Market to reach its potential it was logical to walk away from direct writing and put our future in the hands of independent agents.”

Liberty Mutual’s direct distribution of commercial p-c products officially ended on Jan. 22, and it entered into a definitive agreement to sell the policy renewal rights of its middle market operations to three firms: Arthur J. Gallagher & Co., Hub International (Hub) and USI Holdings Corporation (USI). The transactions are expected to close on or around March 1, 2009.

All agents previously appointed under the Wausau brand will now be appointed under Liberty Mutual Middle Market, but the company is also working to expand its network of appointed agents and brokers.

“Our operating module is deploying 123 territory managers to identify agents that are aligned with our appetite,” Butler says. “So, we have high expectations to grow our business exclusively through agents.”

The company has launched a Web site, www.libertymutualgroup.com/middlemarket, which includes information about the new unit and outlines how agents not previously appointed under Wausau can become appointed under the new brand.

“We are open for business and we look forward to partnering with independent agents and collaborating on business that will benefit everyone,” Butler says. “We no longer are the competition; we are the enabler to help independent agents win in the marketplace.”

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.


  


On the Hill
Big “I” Sends Letter to President Barack Obama
Letter outlines concerns and praises state insurance regulation system.

The Big “I” recently sent a letter to President Barack Obama congratulating him on becoming the 44th president of the United States and encouraging him to preserve the successful state system of insurance regulation in his financial services regulatory reform efforts. The letter points out that while the Big “I” supports efforts for targeted regulatory reforms to enhance uniformity and efficiency, state regulation of insurance has long excelled at the primary responsibilities of consumer protection and financial regulation. In the two page communication on behalf of the association, Robert Rusbuldt, Big “I” president and CEO, also offers to help and work with the new administration, especially on issues pertinent to independent insurance agents and brokers.

The full text of the letter follows:

January 23, 2009

The President
The White House
1600 Pennsylvania Avenue
Washington, D.C. 20510

Dear President Obama:

On behalf of the Independent Insurance Agents and Brokers of America (IIABA or the Big “I”) and our over 300,000 small business members and their employees, we want to congratulate you on becoming the 44th President of the United States. We look forward to working with you and your Administration on the important issues facing our nation.

The economic crisis has quickly spread beyond Wall Street and now affects nearly every American business.  IIABA represents independent small business owners whose homes and businesses are on Main Streets across America, and they have seen firsthand the far-reaching effects of the crisis. Our members are leaders and representatives of the communities in which they reside, and as such, we pledge to work with you and your Administration to take whatever steps necessary to resolve the ongoing financial crisis.

We applaud you for making efforts to solve this crisis and to modernize the financial services industry’s regulatory system a priority of your Administration, and we agree with you that the 111th Congress must begin this hard task of reform. IIABA believes that any financial services regulatory reform efforts must comport with two basic tenets. First, the Administration and Congress should attempt to fix only those components of the regulatory system that are broken, and second, no actions should be taken that would in any way jeopardize the protection of the consumer. We have long held these beliefs and have shared these tenets publicly with Congress during congressional testimony.

As you begin this process, we believe that it is important to note that there are areas where existing regulatory structures have and continue to work well for both consumers and businesses. Specifically, the state-based system of insurance regulation has served both policyholders and the insurance industry well for over 100 years. State insurance regulators actively monitor insurance entities for potential financial trouble and have many different tools to help insurers navigate adverse market developments. In addition, the state system utilizes a very effective safety net, the state guaranty fund mechanism, to protect consumers in the rare case of insurer insolvency.

Even the failure of AIG, whose collapse emanated from its Financial Products division not its insurance operations, highlights the strength of the insurance regulatory system. Throughout the collapse and federal rescue of this large financial services holding company, AIG’s insurance subsidiaries have been consistently hailed as healthy and stable.  These state-regulated insurance entities continue to pay claims to consumers, which is the strongest testament yet to the strength of insurance regulatory system.

We therefore strongly encourage you to preserve the state system of insurance regulation as you engage in your financial services regulatory reform efforts. Many lessons can be learned from the current economic crisis, but one of the most significant points is that the paramount responsibilities of any financial services regulator should be both the protection of the consumer and the solvency of the institution. While in definite need of targeted regulatory reforms to enhance uniformity and efficiency, state regulation of insurance has excelled at these two primary responsibilities, and we want to ensure that this fact is not lost in the overall debate on financial services regulatory reform.

Congratulations again on becoming the 44th President of the United States. IIABA, the Professional Independent Insurance Agents of Illinois, our entire national membership, and our staff stand ready to work with you on any endeavors undertaken by your Administration, but particularly on those that affect the insurance market, small businesses, and the work of independent insurance agents. Please do not hesitate to call on us if we can be of any assistance.

Sincerely,

Robert A. Rusbuldt
President & CEO

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.






P&C Trends
Advising Frugal Customers
Agents educate, empathize as insureds adjust policies in challenging economic climate.

Increasing numbers of insurance customers are dropping or adjusting their personal lines coverage, and independent agents are striving to help them make wise insurance decisions in an economic climate that may produce the highest number of uninsured drivers in history.

According to a recent study by the Insurance Research Council, one in six drivers may be driving uninsured by 2010. The projected spike is strongly linked to the economy, as an unemployment rate increase of 1% correlates with a rise in uninsured motorists of more than three quarters of a percent. The number of uninsured drivers is expected to rise from 13.8% in 2007 to 16.1% in 2010, based on current unemployment projections.

Rodney Taylor, president of Charlotte Insurance Agency in Port Charlotte, Fla., says coverage adjustments are split fairly evenly between auto and homeowners at his agency. He notes that customers are more price conscious than he’s ever seen in 20 years in the business.

“We, as agents, have to listen to our customers very closely,” says Taylor. “They still rely on our advice, and we have to respect and respond appropriately to their cost concerns without giving bad advice.”

Tom Schneider has also noticed that every dollar counts to his customers these days. Schneider, president of Schneider Insurance Agency in Gahanna, Ohio, says clients are now making changes to their policies that they would not have considered significant in the past, such as dropping collision coverage on older vehicles. Schneider also advises customers to eliminate other coverages that aren’t absolutely necessary, such as towing coverage and rental reimbursement.

When John Hosey’s customers alter their policies in any way, they have to sign a waiver indicating they fully understand the change. Hosey, president of Caton-Hosey Insurance Agency in Port Orange, Fla., places great emphasis on educating his customers about the repercussions of taking on more risk.

“We really stress that customers shouldn’t change the replacement costs on their homes,” says Hosey. “We show them the replacement cost guidelines and make sure they’re within those guidelines.”

Often, customers compromise by accepting a higher deductible to save money on premiums. Joe Strunk, president of Alexander & Strunk Insurance in Oklahoma City, says he encourages his customers to consider this option before making a drastic change in coverage.

“I don’t like lowering liability limits, so I always encourage customers not to do that,” says Strunk. “Instead, they usually opt to raise the deductible.”

Agents agree that it’s often difficult to walk the fine line between customers’ financial needs and providing optimal insurance coverage. In the end, says Strunk, it’s about empathy.

“We have to try to put ourselves in our customers’ shoes,” he says. “If they’re trying to save money, we work to find them ways to do so and if we can’t, we have to explain why.”

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.


P&C Trends
P-C Premiums and GDP: The Insurance Industry’s Proportion of Economic Output
Fluctuation in the industry’s economic position is to be expected.

Recently, macroeconomic news has been a mainstay on newspaper front pages everywhere.  Most people in the insurance industry have a good understanding that the property-casualty insurance industry is necessary for the smooth operation of the overall economy. But how many know what percentage of the economy’s final output is represented by premiums in the insurance industry?

The table below shows that the insurance and financial services industry is a modest but important component of the overall U.S. economy, accounting for about 3.5% of the GDP.  Interestingly, total p-c premiums on all lines are about the same as current defense spending and about 10 times the estimated investment banking industry revenues.  Health care, perhaps the most oft-cited component of the U.S. GDP of late, has increased steadily over time to about 15% today. As readers are probably aware, the health care component of the GDP is projected to grow dramatically as the “baby boom” generation ages.



Readers should also be aware that the insurance industry’s percentage of the overall economy is not static. As the market changes from soft to hard, there are visible phases in the percentage of the economy that businesses and consumers spend on p-c insurance. Hard markets stand out in the graph below, most notably in the mid-1970s and mid-1980s and most recently in 2001-2002. By measure of percentage of GDP, the hardest market ever was in the mid-1980s. Anyone who lived through that time can probably recall the famous Time magazine cover declaring, “Sorry America, Your Insurance Has Been Cancelled” (Click here to view the cover). As the industry waits for pricing discipline to return to p-c markets, everyone can take some solace in the fact that the industry isn’t experiencing the market of the mid-1980s or the tough environment of 1944.



Note: P-c premiums are net written premiums as obtained from A.M. Best Aggregates and Averages and they have been adjusted to constant year 2000 dollars, as were the GDP figures from the Bureau of Labor Statistics.

Paul Buse (paul.buse@iiaba.net) is president of Big I Advantage^SM and a licensed p-c agent. 


L&H Trends
Helping Retirees Find Additional Sources of Revenue
Independent agents have numerous resources at their disposal.

There is virtually no one in U.S. who hasn’t been influenced by the recent economic turmoil. Whether it be workers who find themselves downsized or having their wages frozen, current or future college students who saw their (or their parents’) savings slide with the downturn in the stock market or members of families of small business owners coping with reduced income.

One particular group, retirees, has been particularly hard hit by the economy, but in a different way than most people. During the 1970s, seniors had to deal with inflation’s impact on their fixed incomes, which typically consisted of monthly pension checks and Social Security benefits. This time around, inflation has not been the issue, save ever-increasing medical costs, but rather it’s been the stock market decline coupled with very low historical yields on retirees’ savings. Currently, it’s difficult for retirees to try to find an adequate return on their funds:  bond yields are very low and the possibility of increasing rates could reduce their principal balances. It is challenging to put a significant amount of funds in the market given its fluctuating returns, even though there are currently some attractive dividend yields as a result of reduced share prices.

Independent insurance agents can help their senior customers with this dilemma with a very straightforward insurance vehicle: an immediate life annuity. Assuming that a retired couple, both age 70, has a total amount of $500,000 and they are worried that their returns on their conservative accounts – CDs, government bonds and other investments- are yielding only 4% ($20,000) and that their total Social Security benefits are $36,000 annually. They have also paid off their house which is now worth about $250,000. Their parents lived into their late 80s and, as a result, the couple is concerned about withdrawing their principal to meet their target of $60,000 annually. They are very risk-adverse given the financial crisis.

One simple strategy is to have each retiree purchase an immediate annuity with $100,000. At their current ages, they can receive $9,750 annually for the husband and $9,250 annually for the wife for a total annual income of $19,000. Assuming they will receive 4% earnings on their remaining $300,000 balance ($12,000) and taking into account their Social Security benefits, this solution will yield $36,000 for a total annual income of $67,000 with very little risk. Their biggest risk is inflation, but Social Security has an inflation component based on CPI, so they can save the excess payment of $7,000 and that balance will also help to mitigate the impact of inflation down the road. Alternatively, they could have purchased an inflation adjusted annuity but with a lower annual payment. The couple can also put some of the remaining $300,000 from their IRA into TIPS (treasury inflation-protected securities).

Lastly, in the event that the husband dies within five years, the widow’s Social Security benefits might reduce to $24,000 annually (the husband’s monthly benefit was $2,000 a month and her Social Security payments will drop off) and she’ll lose his $9,750 life annuity. Fortunately, she can consider taking out a reverse mortgage if needed to make up for the loss of her husband’s life annuity, so she will not experience a decline in her standard of living.
 
The independent agent who assisted them in meeting their needs would receive a commission in the $4,000 - $6,000 range (2% - 3%). The biggest threat to this scenario is if the husband needed long-term care (LTC) for several years. In that case, the $300,000 balance could be mostly depleted. Fortunately, the independent agent had made them aware of this exposure years ago and they had purchased LTC insurance so they did not have that financial concern.
 
Agents should not sit on the sidelines when it comes to helping their customers deal with retirement concerns. Annuities, LTC insurance, Medicare Supplements and permanent life insurance are all needed products in bringing peace of mind.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.